Starting With Curious

It is sadly not uncommon, in a market economy, for a seller to take advantage of those with a desperate need in order to maximize profits.  War profiteering is one familiar example.   US Marine General Smedley Butler, in his 1935 book “War Is A Racket,” decried military contractors who, in the heat of World War I, jacked up their profits to as much as 1700%.  This seems completely outrageous.  So what do we make of Turing Pharmaceuticals, a start-up run by a former hedge fund manager, which bought the rights to a 62-year old drug called pyramethamine (used to treat parasitic infections including malaria)?  Turing raised the wholesale price of the drug, which costs about a dollar a pill to manufacture, from $13.50 (already a 1350% profit margin) to $750 (75,000%).

A slew of such multiple-order-of-magnitude price hikes in medications has occurred in the past couple of years.  High prices for pharmaceuticals are often defended on the basis of the expense of research and development, and the fact that so many prospective new drugs fail.  But how can one argue that in the case of a drug that has been on the market for six decades, during which time the pretty tidy 13-fold markup must have paid off the R&D costs?  Which, by the way, were incurred by someone else.

Medication prices are an important driver of the high cost of health care in the US.   Prices for pharmaceuticals in the US are more than twice as high as in the next highest nation.  And remember, unlike clinic visits or hospital stays, where there may be important differences that obscure such comparisons, here we are comparing apples to apples (or aspirin to aspirin): it is by and large the same drugs available in Milwaukee as in Milan or Munich or Madrid.

Every other nation controls its costs in one of two ways.  In many countries, where the government is the largest purchaser of medications because of some form of nationalized healthcare, it simply leverages that bargaining power to negotiate better prices with the pharmaceutical companies.  Interestingly, the government is also the largest purchaser of drugs in the US, too: between Medicare, Medicaid, the military, and the veteran’s health system.  However, when the Medicare drug benefit was created in 2003, Congress explicitly prohibited the agency from negotiating prices.  Another approach is to set price limits on approved medications, as is done, for example, in Switzerland.  While this might reek of big government, the Swiss are hardly known as regulatory fanatics.  Moreover, this is tolerated despite the fact that two of the largest drug companies in the world are based in Switzerland, where the pharmaceutical industry accounts for 6% of GDP (compared with only 1% in the US).  These companies can still make a very handsome profit, and support their research and development, but at about half the cost to the public as in the US.

Indeed, if the real reason for high drug prices is to support R&D, it would appear the US is subsidizing new drugs for the rest of the world, which would be problematic enough.  But even Martin Shkreli, the CEO of Turing who engineered the Daraprim price hike, admits it’s really just about making his company as profitable as possible.  That sounds like profiteering of the kind Gen. Butler warned about.  As far back as the Civil War, the False Claims Act (still on the books) was passed to prevent such behavior, and contractor malfeasance in the Iraq War led to the War Profiteering Prevention Act of 2007.  When will we see a Pharma Profiteering Prevention Act?

Transparent (\tran(t)s-ˈper-ənt). adj.

1. allowing light to pass through so that objects behind can be distinctly seen
2. free from pretense or deceit; easily understood

The buzzword in healthcare today is transparency, and especially price transparency.  The foundation of market-based reforms, including but not at all limited to the passage of the Affordable Care Act, is the concept of consumerism:  the notion that people with good information about quality and cost will make choices based on value.  There is a great deal of debate about every word in that sentence, but for the moment let’s focus on cost.

Cost, like beauty, is in the eye of the beholder.  To a consumer, the relevant question is “How much of my money will I have to give you to get your service?”  Ideally, this would be answered before the purchase.  How many of us go into a store, load up the cart, and then wait for the bill to arrive a month later?  In some settings, like a grocery store, pricing is easy.  Buying a car, on the other hand, may be more complicated.  There is the sticker price, but no one really pays that.  You negotiate a price with the dealer, and then you might also negotiate a price for a trade-in.  In all those cases you also need to account for taxes, and perhaps some fees.  But at the end, perhaps with pencil and paper and a calculator, you can figure out what the item will cost before you commit to buying it.

In healthcare, the complications are exponentially higher.  There is the sticker price (also known as the “charge master price”) which again, no one ever pays.  Then, depending on the insurance you have, there is an already-negotiated discount on that sticker price.  How much of that discounted price is coming out of your pocket in turn depends on the insurance terms: whether you need to pay a fixed amount per service (co-pay); whether you have to pay a percentage of the charge (coinsurance); and whether there is a minimum amount per year that you must pay before the insurance even kicks in (deductible).  But the biggest obstacle to transparency is the fact that it’s very difficult to know in advance what items are going to be in the cart.

Let’s take one of the simplest things I can think of: a sore throat.  How much does it cost to take care of a sore throat?  Well, you’ll need a provider to ask you some questions and examine you.  Then, it needs to be determined whether it is caused by a bacteria (which would be treated with antibiotics) or a virus (which needs only medication for symptoms).  Not everyone needs a test for the bacteria, since the likelihood of a strep throat correlates with the exam findings.  And then even for cases where there is a bacterial infection (strep), the choice of antibiotic might be affected by whether the patient has allergies.  So the answer to how much will it cost is – it depends.  Not very satisfying.  And that’s the easiest one!

As a provider, I could look at an expected resource use based on prior experience.  Of the last 100 people who came in with sore throat, 60 needed a strep test, 30 were diagnosed with strep, and of those 28 got penicillin and 2 something else.  I can then calculate an average price.  If that’s what I subsequently charge, some individuals (someone who doesn’t need a strep test or antibiotics) might pay more than they would under the old system, while those who need both a test and a prescription might pay less, but at least they would have a guaranteed price up front.

Some providers have started to do this with some other common conditions and procedures, such as joint replacements for adult patients.  But there are unfortunately few conditions that lend themselves to this kind of calculation, as there are simply too many “what ifs.”  This is particularly true in pediatrics, for several reasons.  First, there is more natural variation.  A sore throat in a 2 year old is different than in a 7 year old which is different than a 15 year old.  Second, the number of children with most conditions is fairly small, making it hard to do this sort of estimate.  Pediatric providers are also at a disadvantage because a general hospital might decide to offset that uncertainty by cross-subsidizing pediatric care from their much larger adult business.  Say for example that the average adult sore throat costs $70, but for kids it’s anywhere from $60 to $100. Charging $70 across the board for both adult and pediatric patients undercuts the provider that only cares for kids.  Pediatrics becomes a loss leader.

One of the reasons so much health care is paid for under an insurance system is because it is so difficult to know the costs up front.  But with high deductible plans and increasing cost sharing, patients are becoming consumers, and buying healthcare is more like buying a car.  I am skeptical, however, that despite all the talk about “transparency” that costs in health care will ever be distinctly seen, much less free from pretense or easily understood.   An unsuccessful quest for transparency may undermine the push toward consumerism.  Single payer, anyone?